A Board Member Bought About $50,000 Worth of IHS
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According to a Form 4 filed with the SEC, Jean-Paul Montupet, a Board member at IHS (NYSE: HIS) purchased 500 shares of the stock on Jan. 22 through a trust at an average price of $99.26. Montupet also owns a little over 3,400 shares of IHS directly. IHS is an information, analysis, and consulting company with a market capitalization of $6.8 billion. Studies show that stocks bought by insiders tend to outperform the market (read more about studies on insider trading) and we think that this is because insiders face such strong incentives to avoid buying the stock that it is a bullish signal to see them going against these incentives. IHS had been the target of multiple insider purchases in late September and early October 2012, at prices of about $90 per share (See our records of these insider purchases).
IHS’s fiscal year ended in November, with the company reporting a 15% increase in revenue from the previous fiscal year (the previous year’s growth rate on the top line had been 25%). Sales were up 12% in the fourth quarter of the fiscal year versus a year earlier, so we’d conclude that while the business is growing, its growth rates are slowing down. Earnings have also been up; they increased 17% in the last fiscal year, helped by very strong margins in the fourth quarter.
The market is very optimistic about the company, with the stock trading at 44 times trailing earnings. Certainly IHS has been growing nicely, but it did appear to us that its growth rates were slowing, and a P/E of 44 suggests very high growth expectations. Wall Street analysts are forecasting high growth for the next couple years; the forward price-to-earnings multiple, based on the fiscal year ending in November 2014, is 20. We would avoid the stock given the trendline in revenue growth; it’s not as likely that the company will hit its targets as would be desirable.
Conatus Capital Management, managed by David Stemerman, increased its stake in IHS by 16% during the third quarter of 2012 to a total of about 520,000 shares. Stemerman had previously worked at billionaire and Tiger Cub Stephen Mandel’s Lone Pine Capital (see more of Stemerman's stock picks). Robert Caruso’s Select Equity Group reported a position of 1.2 million shares at the end of September. Caxton Associates, founded by billionaire Bruce Kovner, sold its stake in the company during the third quarter.
IHS’s peers include FactSet Research Systems (NYSE: FDS), Dun & Bradstreet (NYSE: DNB), Thomson Reuters (NYSE: TRI), and Moody’s (NYSE: MCO). The forward P/E of 20 places IHS at a premium to these other companies; FactSet is the closest at 19 times forward earnings estimates. FactSet’s most recent quarterly report showed revenue and net income growth in the high single digits versus a year earlier, so we’d also be skeptical that it is undervalued. The other three companies have all been reporting high earnings growth, though in the cases of Dun & Bradstreet and Thomson Reuters this has occurred despite a decline in sales. As a result we have to be wary of those two peers as well, though Dun & Bradstreet does at least look cheap at a trailing and forward P/E of 13 and 10 respectively. Moody’s is more in “growth at a reasonable price” territory, with earnings multiples in the high teens. It might be worth further consideration, though we’d be wary of such a large company continuing to out-grow these other businesses we’ve mentioned.
We don’t think that investors should be imitating this insider purchase. As we’ve mentioned, IHS should have more growth ahead of it but the valuation looks high considering that growth rates, particularly in terms of revenue, seem to be slowing. We would prefer to take a closer look at Dun & Bradstreet from a pure value perspective, and at Moody’s to study whether or not it can maintain high growth rates.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends FactSet Research Systems and Moody's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!